SMB Training Blog

Technicals Trump The Tape in Financials

We consider three things when making an intra-day trade: The Tape, The Technicals, and the News. How each of these factors is weighed depends on the particular setup, the type of stock and current market conditions.

JPM was the first large financial to report numbers on Friday. The numbers were not particularly good and it was showing weak price action in the pre-market. So we had two checks on the short side for JPM from news and price action.

What about the Tape? The big financials all trade tens of millions of shares each day. You cannot read the tape in these names. Occasionally you may identify a level that will not drop or lift but when HFTs are banging around 1mln+ shares at a time there is really no edge in attempting to read the tape.

I made the mistake, and I believe several others on the desk did as well, of attempting to use the Tape to cover a short position and get long JPM on the Open Friday. Look at the chart below. JPM failed between 35.80 and 35.90 as the pre-market action indicated to me it would. There was a nice short opportunity there.

Today C reported worse numbers than JPM and its price action in the pre-market was a “bear flag”. The pre-market resistance was between 29.90 and 30 as indicated from this snapshot from our pre-market game plan. We identified 29 and 28.50 as longer term support so our job as traders was to short as close to the pre-market resistance and cover at the longer term support if the price action dictated.

C was almost an exact repeat performance of what we saw in JPM on Friday. Nice pre-market downtrend. Pop on the Open to a pre-market resistance area. Then a resumption of a downtrend. The reason why I chose to show 15 minute charts to illustrate these two trades is that sometimes traders will use 1 or 3 minute charts as an excuse to get out of a bigger picture trade when in fact they should be using the lower time frame to help them time their entries better. That is all.

The same principle should be applied to reading the tape. Use it to better time your entries for bigger picture plays. Leave the scalps to the computers (except very experienced tape readers). They are faster than you. That is not where your advantage lies.

Steven Spencer is the co-founder of SMB Capital and SMB Training and has traded professionally for over 15 years. His email is [email protected] for a free trial of the Stocks In Play call send an email to [email protected]